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2 Questions Investors Need to Ask About Biogen's Latest Deal

The biotech giant had other options.

Biogen Idec(NASDAQ:BIIB) is jumping into the sphingosine 1-phosphate 1, or S1P1, receptor field with its licensing of Mitsubishi Tanabe Pharma's S1P1 receptor target, MT-1303.

The biotech giant is paying $60 million up front and is on the hook for up to $484 million in additional milestone payments for multiple indications and territories. MT-1303 is ready to be put into phase 3 trials, which Biogen will run. If the drug is approved, Biogen will owe Mitsubishi Tanabe Pharma royalties on sales, although the exact percentage wasn't disclosed.

Given the potential to use drugs that target the S1P1 receptor for multiple sclerosis -- Biogen's mainstay -- it's certainly a good fit for the biotech. Activation of the S1P1 receptor stimulates the movement of white blood cells out of the lymph nodes, so blocking the receptor decreases the immune system activity, potentially helping other autoimmune diseases, such as ulcerative colitis and Crohn's disease.

While the license looks like a good move for Biogen, it does raise a few questions for the other companies developing drugs targeting the S1P1 receptor.

Why didn't Biogen buy Receptos?Last month, Celgene(NASDAQ:CELG) closed its acquisition of Receptos for $232 per share, or $7.2 billion. The main purpose of the acquisition was to get ahold of Receptos' S1P1 receptor drug, ozanimod.

But Celgene wasn't the only bidder, according to a document filed with the SEC. Another bidder, which Receptos calls "Party B," made a bid for $225 per share, topping Celgene's initial offer of $193 per share. After doing more due diligence, Party B pulled back its offer and subsequently tentatively offered $200 plus contingent value rights. Receptos eventually settled for Celgene at $232 per share.

Is Biogen the mysterious Party B? Or perhaps it's Party A or Party C, which both offered Receptos licensing deals that it turned down because the "proposals did not appropriately reflect the value of the Company's prospects."

Alfred Sandrock Source: Biogen.

Receptos' ozanimod is already in a fully enrolled phase 3 trial in patients with relapsing multiple sclerosis, so it's considerably ahead of MT-1303, which hasn't started a phase 3 program yet, and ozanimod clearly deserves a higher price tag than MT-1303.

But only time will tell if Celgene overpaid for Receptos or if Biogen made a mistake by not paying up for the more advanced asset.

And, of course, being first to market isn't everything. Biogen's chief medical officer, Alfred Sandrock, claims that "MT-1303 could be a best-in-class S1P modulator," although Mitsubishi Tanabe Pharma hasn't released much data, so it's hard to verify that claim.

Did Biogen consider Arena Pharmaceuticals' S1P1 receptor drug? Arena Pharmaceuticals(NASDAQ:ARNA)has a drug that targets the S1P1 receptor, called APD334, which has completed a phase 1 trial, showing that the drug lowers white blood cell levels. The trial was in healthy volunteers, but presumably since the mechanism of action is working, it should help patients with autoimmune diseases as the S1P1 drugs ahead of it have.

If Biogen is more interested in quality over speed -- and that's just conjecture at this point -- it's curious that the company picked MT-1303 over APD334. Mitsubishi Tanabe Pharma has more efficacy data than Arena Pharmaceuticals -- even if it hasn't shared it with the public -- so maybe Biogen's decision was for the best data at the time and APD334 could still have a shot at taking market share if it makes it that far.

The other possibility is that Biogen did try to license APD334, and Arena Pharmaceuticals turned the offer down because it didn't like the price. If Arena ever does get acquired, maybe we'll find out in a future SEC document.

While not getting picked up by Biogen is certainly disappointing for Arena Pharmaceuticals, the bigger issue is that Biogen's deal sets a price tag on APD334. Unless its phase 2 data is substantially better than MT-1303, it'll be hard for Arena Phamraceuticals to get much more than $60 million up front and around $500 million in milestone payments that are likely to be back-end loaded after it's completed a phase 2 trial. That doesn't sound nearly as good as the potential for a $7.2 billion buyout.